Dror Ortho-Design, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. In certain instances, parenthetical references are made to relevant sections of the Notes to Financial Statements to direct the reader to a further detailed discussion. This section should be read in conjunction with the Financial Statements and Supplementary Data included in this Annual Report on Form 10-K. This MD&A contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this MD&A to “Dror,” “we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Share Exchange (as defined below), the business and operations of Dror Ortho-Design, Inc. and its consolidated subsidiaries, and (ii) prior to the Share Exchange, Dror Ortho-Design Ltd. (the predecessor entity and currently wholly owned subsidiary of Dror Ortho-Design, Inc.). All dollar amounts in this registration statement refer to U.S. dollars unless otherwise indicated. Overview We were incorporated as Novint Technologies, Inc. in the State of New Mexico in April 1999. On February 26, 2002, we changed our state of incorporation to Delaware by merging with Novint Technologies, Inc., a Delaware corporation. On July 5, 2023, we entered into a share exchange agreement with the shareholders of Dror Ortho-Design, Ltd. (“Private Dror”), pursuant to which the shareholders of Private Dror agreed to exchange all of their outstanding ordinary shares Private Dror for shares of our Common Stock and convertible preferred stock (the “Share Exchange”). On August 14, 2023 the Share Exchange was consummated and we changed our name to “Dror Ortho-Design, Inc.” Following the Share Exchange, we succeeded to the business of Private Dror as its sole line of business. The Share Exchange is being accounted for as a recapitalization, with Private Dror deemed to be the accounting acquirer and the Company the acquired company. Accordingly, Private Dror’s historical financial statements for periods prior to the consummation of the Share Exchange have become those of the Company. Operations reported for periods prior to the Share Exchange are those of Private Dror. Our Company We have reimagined the way people can correct their smile. We plan to disrupt the aligner market by offering millions of people a revolutionary alternative. We believe that people do not need to change their lifestyle to correct their smile as they are required to do with existing aligner solutions. Existing aligner solutions generally share the same treatment principles, which are different from our solution. In most cases, patients seeking to improve their smile need to undergo a 12-to-15 month process of wearing plastic aligners, which need to be worn the entire day and should only be removed while eating or drinking. Patients are prescribed a series of 20 to 30 aligners that are intended to forcefully move teeth progressively closer to their intended final position. This process causes pain every time a new aligner is used and restricts blood circulation, which counterproductively slows down tooth movement. All-day aligner solutions are also intrusive, as patients need to conduct their lives at work or school wearing the plastic aligners. In addition, most existing aligner therapies require multiple visits to an orthodontist to monitor the progress of treatment plans through intraoral scanning, physical examination and patient testimony. 50 We believe that recent rapid advancements in technology have made traditional aligner solutions no longer the most effective treatment option for smile correction. Our Company has developed a proprietary AI-based platform to correct people’s smiles in a discreet and less painful manner – ZSmile (the “Platform”). The Platform uses only one smart aligner to gently move teeth into their optimum position with pulsating air while the patient is sleeping or at home. The Platform, which is based on our predecessor first generation Aerodentis System, is a Class II medical device and received 510 (k) clearance from the FDA for commercialization in the U.S. in February 2026. Our Aerodentis System previously received 510(k) clearance from the FDA in April 2020. The Company currently does not generate revenues to fund operations and anticipates that it will continue to incur significant losses as it continues to develop the Platform. Please refer to “Risk Factors - We are in the development stage, are not generating revenues and have no operating history in the manufacturing and distribution of orthodontic medical devices or platforms for consumer use.” for additional information. The Company intends to spend approximately $1 million over the next 12 months on software and hardware development as well as the accompanying regulatory approvals and IP protection associated with such software and hardware projects. Going Concern We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2025, we had cash of approximately $228,000, working capital deficit of approximately $2.7 million, an accumulated deficit of approximately $22 million and used cash in operations during the twelve months ended December 31, 2025 of approximately $2.1 million. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. Such factors raise substantial doubt about our ability to sustain operations for at least one year from the issuance of the audited financial statements included in this Annual Report. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. In response to these conditions and events, we are evaluating various financing strategies to obtain sufficient additional liquidity to meet our operating and capital requirements for the next twelve months following the date of this Annual Report. The potential sources of financing that we are evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. We also plan to finance near-term operations with our cash on hand, as well as by exploring additional ways to raise capital. There is no assurance we will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to us and the timing and probability of obtaining sufficient capital depend, in part, on our further developing and commercializing the Platform and on future capital market conditions. If our current assumptions regarding the pace of such development are incorrect, or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, we may have to reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of the Platform. Results of Operations Comparison of the Years Ended December 31, 2025 and 2024 The following table sets forth the results of our operations for the years ended December 31, 2025 and 2024: Years Ended December 31, Change Change 2025 2024 $ % Research and development $ 815,902 $ 1,540,097 $ (724,195 ) (47 )% General and administrative $ 1,367,916 $ 1,437,832 $ (69,916 ) (5 )% Share-based compensation $ 39,170 $ 2,246,033 $ (2,206,863 ) (98 )% Other expense, net $ (321,899 ) $ (551,989 ) $ 230,090 42 % Research and Development Expenses Research and development expenses were $815,902 for the year ended December 31, 2025, compared to $1,540,097 for the year ended December 31, 2024. The decrease in research and development expenses of $724,195 or 47%, was primarily due to decreased activity relating to the development of our new product primarily outsourced consulting activities due to limited funding. General and Administrative Expenses General and administrative expenses were $1,367,916 for the year ended December 31, 2025, compared to $1,437,832 for the year ended December 31, 2024. The decrease in general and administrative expenses of $69,916 or 5%, was primarily due to a reduction in professional fees during the period offset by an increase in salary related expenses. 51 Share-based Compensation Expenses Share-based compensation expenses were $39,170 for the year ended December 31, 2025, compared to $2,246,033 for the year ended December 31, 2024. The decrease in share-based compensation expenses of $2,206,863 or 98%, was primarily due to the majority of the outstanding stock options vesting in 2024. Other expenses, net Other expense was $321,899 for the year ended December 31, 2025, compared to $551,989 for the year ended December 31, 2024. The decrease in other expenses, net of $ 230,090 or 42%, was primarily due to the recognition of the Liquidated damages accrual of $520,000 in 2024, which was partially offset by debt discount amortization of $309,869 and a decrease in the fair value of the derivative of $29,448. Liquidity and Capital Resources Sources of Liquidity We do not have revenues to fund operations. We anticipate that we will continue to incur significant losses as it continues to develop its product. Historically, our primary source of cash has been proceeds from the sale of equity instruments. We intend to spend approximately $1 million over the next 12 months on software and hardware development as well as the accompanying regulatory approvals and IP protection associated with such software and hardware projects. During the year ended December 31, 2025, the Company received $1,750,000 in the form of bridge loans from existing investors, as further described below. On February 26, 2026 the Company received an additional $200,000 in the form of a bridge loan from existing investors, as further described below. We will need to raise additional capital to fund operating losses and grow our operations. There can be no assurance however that we will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. Such factors raise substantial doubt about our ability to sustain operations for at least one year from the issuance of the audited financial statements included in this Annual Report. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. For additional information, see the section above titled “MD&A—Going Concern.” Bridge Financings On each of June 5, 2025, June 16, 2025, and July 17, 2025, the Company entered into a Securities Purchase Agreement (collectively, the “Initial Purchase Agreements”) with certain existing investors, pursuant to which, the Company agreed to sell to the purchasers in private placements (the “Private Placements”), debentures (collectively, the “Initial Debentures”) in an aggregate principal amount of $300,000 due August 5, 2025, $200,000 due August 15, 2025, and $200,000 due September 17, 2025, respectively. Each of the Initial Debentures were extended to December 13, 2025 and subsequently were extended to March 31, 2026. On November 12, 2025, the Company entered into a securities purchase agreement (the “November 2025 Purchase Agreement”) with each of the purchasers signatory thereto (the “November 2025 Investors”), pursuant to which, the Company agreed to sell to the November 2025 Investors in a private placement, debentures in an aggregate principal amount of $600,000 due January 11, 2026 (the “November 2025 Debentures”). Pursuant to the November 2025 Purchase Agreement, the November 2025 Investors have the right to purchase additional debentures, which are subject to the same terms as the Debentures, in an aggregate principal amount of $200,000. In advance of signing the November 2025 Purchase Agreement, in September 2025, the Company received $400,000 from certain November 2025 Investors. On December 2, 2025, the Company entered into a securities purchase agreement (the “First December 2025 Purchase Agreement”) with each of the purchasers signatory thereto (the “First December 2025 Investors”), pursuant to which, the Company agreed to sell to the First December 2025 Investors in a private placement, debentures in an aggregate principal amount of $200,000 due February 2, 2026 (the “First December 2025 Debentures”). On December 30, 2025, the Company entered into a securities purchase agreement (the “Second December 2025 Purchase Agreement”) with each of the purchasers signatory thereto (the “Second December 2025 Investors”), pursuant to which, the Company agreed to sell to the Second December 2025 Investors in a private placement, debentures in an aggregate principal amount of $250,000 due February 28, 2026 (the “Second December 2025 Debentures”) Each of the debentures sold during the year ended December 31, 2025 were extended to March 31, 2026. On February 26, 2026, the Company entered into a securities purchase agreement (the “February 2026 Purchase Agreement”) and, together with the Initial Purchase Agreements, the November 2025 Purchase Agreement, the First December 2025 Purchase Agreement and the Second December 2025 Purchase Agreement, the “Purchase Agreements”) with each of the purchasers signatory thereto (the “February 2026 Investors”), pursuant to which, the Company agreed to sell to the February 2026 Investors in a private placement, debentures in an aggregate principal amount of $200,000 due April 27, 2026 (the “February 2026 Debentures” and, together with the Initial Debentures, the November 2025 Debentures, the First December 2025 Debentures and the Second December 2025 Debentures, the “Debentures”). 52 In addition, pursuant to each Purchase Agreement, the Company agreed to issue (A) subject to the consummation of a public offering by the Company of its securities (the “Public Offering”), warrants to purchase up to a number of shares of Common Stock (the “Purchase Warrants”) equal to: (i) in the event the applicable Debentures are outstanding as of the date of the consummation of the Public Offering (the “Public Offering Closing Date”), 150% of the Debenture Shares (as defined herein) issued, if any; or (ii) in the event that each of the applicable Debentures are not outstanding as of the Public Offering Closing Date, 100% of the Debenture Shares that would have been issued, if any, as if such Debentures were outstanding as of the Public Offering Closing Date, and (B) subject to the completion of a Public Offering by the Company of warrants to purchase shares of Common Stock, additional warrants to purchase shares of Common Stock (the “Additional Warrants” and, collectively with the Purchase Warrants, the “Bridge Warrants”) equal to: (i) in the event that the applicable Debentures are outstanding as of the Public Offering Closing Date, 150% of the number of shares of Common Stock underlying the warrants issued in the Public Offering that the Purchaser would have been entitled to receive had the Purchaser participated in the Public Offering in the amount equal to the Purchaser’s subscription amount under the Purchase Agreement (the “Warrant Subscription Amount”); or (ii) in the event that the applicable Debentures are not outstanding as of the Public Offering Closing Date, 100% of the Warrant Subscription Amount. Debentures Each of the Debentures bear an interest rate of 0% per annum and the maturity date may be extended by the holder for subsequent periods of 60 days upon prior written notice to the Company. The Debentures also set forth certain customary events of default after which the Debentures may be declared immediately due and payable, including certain types of bankruptcy or insolvency events of default. Subject to the satisfaction of certain conditions, including applicable prior notice to the holders of the Debentures, at any time prior to the maturity date, the Company may elect to prepay all or a portion of the then-outstanding principal amount of each of the Debentures. In the event that prior to the respective maturity date the Company consummates a Public Offering, the then-outstanding principal amount of each of the Debentures automatically converts into shares of the Company’s Common Stock (the “Debenture Shares”) at a conversion price equal to the per share price of the shares of Common Stock offered in the Public Offering. The Debenture Shares, if any, are subject to the same terms and conditions as the shares of Common Stock issued in the Public Offering, including the issuance of any accompanying warrants to purchase shares of Common Stock issued and registration rights granted, if any, to investors in the Public Offering. Warrants The Bridge Warrants, if issued, will be exercisable for shares of Common Stock immediately upon issuance, at an exercise price equal to the per share price of the shares of Common Stock offered in the Public Offering (the “Exercise Price”), if any, and expire five years from the date of issuance. The Exercise Price is subject to customary adjustments for stock dividends, stock splits, reclassifications and the like, and subject to price-based adjustment. Private Placement See the section above titled “MD&A—Our Company—Private Placement.” Cash Flows for the Years Ended December 31, 2025 and 2024 Years ended December 31, 2025 2024 Cash provided by (used) in Operating activities $ (2,058,045 ) $ (2,741,822 ) Investing activities (966 ) (25,849 ) Financing activities 1,750,000 - Foreign exchange differences on cash (11,893 ) (30,728 ) Net decrease in cash and cash equivalents $ (320,904 ) $ (2,798,399 ) 53 Cash Used in Operating Activities Net cash used in operating activities was $2,058,045 for the year ended December 31, 2025, as compared to $2,741,822 for the year ended December 31, 2024. The amount for the year ended December 31, 2025 primarily consisted of a net loss of $2,544,887offset by non-cash charges of $363,232 (including: Share-based compensation expense of $39,170, depreciation expense of $4,946, debt discount amortization of $309,869, and foreign exchange differences of $38,695 partially offset by $29,448 of change in fair value of derivative liability), and an increase in operating assets and liabilities excluding cash of $123,610. The amount for the year ended December 31, 2024 primarily consisted of a net loss of $5,775,951 offset by non-cash charges of $2,276,771 (including: Share-based compensation expense of $2,246,033, depreciation expense of $4,035 and foreign exchange differences of $26,703), and an increase in operating assets and liabilities excluding cash of $757,358. Cash Used in Investing Activities During the year ended December 31, 2025, net cash used in investing activities was $966 relating to the purchase of fixed assets. During the year ended December 31, 2024, net cash used in investing activities was $25,849 relating to the purchase of fixed assets. Cash Provided by Financing Activities During the year ended December 31, 2025, cash provided by investing activities was $1,750,000 relating to the bridge loans received from investors. During the year ended December 31, 2024, there was no cash provided by financing activities. Effects of Inflation Management does not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements or financing activities with special-purpose entities. Critical Accounting Policies and Use of Estimates The SEC defined a company’s critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. Research and Development We expense all research and development costs as they are incurred. Research and development includes expenditures in connection with in-house research and development salaries and staff costs, consulting fees, as well as proprietary products and technology. 54 Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could vary from those estimates. Management utilizes various other estimates, including but not limited to accrued royalties, estimated lives of long-lived assets, the valuation of stock-based compensation, the valuation allowance for deferred tax assets and other contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. Recent Accounting Pronouncements In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures” to require more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation, amortization, and depletion) included in certain expense captions presented on the face of the income statement. ASU 2024-03 is effective for fiscal years beginning after December 15, 2026 and for interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied either (1) prospectively to financial statements issued for reporting periods after the effective date of this ASU or (2) retrospectively to all prior periods presented in the financial statements. The Company is currently evaluating the impact of adopting this guidance on its condensed consolidated financial statements and related disclosures. The adoption of this pronouncement is not expected to have a material impact on the Company’s condensed consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures related to improvements to income tax disclosures. The amendments in this update require enhanced jurisdictional and other disaggregated disclosures for the effective tax rate reconciliation and income taxes paid. The amendments in this update are effective for fiscal years beginning after December 15, 2024. The adoption of this pronouncement did not have a material impact on the Company’s consolidated financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.